Investors see a repeat of the 2022 scenario as a tail risk. The baseline scenario is a quick ceasefire in the Middle East. However, the prediction market thinks otherwise. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Current events have a lot in common with those of 2022.
- The prediction market does not believe the conflict will end before May.
- The odds of a Fed rate cut are falling.
- Short trades on the EUR/USD pair can be considered on a rebound from 1.164 and 1.168.
Weekly Euro Fundamental Forecast
The market’s reaction to war is always overly emotional, especially in the early stages. In addition to Asian stocks, which appear to be the most affected by the conflict in the Middle East, investors are increasingly buying US assets. As a result, US stock indices are not falling even amid a geopolitical shock, and the dollar is poised to record its best weekly performance in a year. Another thing is that, after emotions, logic comes into play, which leads to the consolidation of EUR/USD quotes.
Comparisons with 2022 seem appropriate. Oil is growing at its fastest pace in four years, the greenback is rapidly strengthening, far outpacing other safe-haven assets, and US Treasury bond yields are skyrocketing. As before, gold and the S&P 500 index remain stable at first. Then they fell, and investors may face such a scenario this time as well. The fact is that markets perceive the prolonged conflict in the Middle East as a tail risk. The baseline scenario suggests that the conflict will end relatively quickly.
Odds for US-Iran Ceasefire in March
Source: Wall Street Journal.
According to Polymarket, the probability of military action ending by the end of March has fallen from 63% to 24%. The prediction market estimates the chances for April at 45% and for May at 60%. This is a matter of months, not weeks. At the same time, the longer the armed conflict between the US, Israel, and Iran lasts, the higher the risks of Brent rallying above $100 per barrel, accelerating inflation, slowing global economic growth, and, finally, the return of the energy crisis to Europe. According to Barclays, a 10% increase in natural gas prices leads to a 0.5-1% drop in the euro, while a 10% increase in oil prices boosts the US dollar by 0.5-1%.
Along with deteriorating trade conditions in the eurozone due to rising energy prices, pressure on the EUR/USD pair is exerted by the reduction in the probability of two Fed monetary expansion acts in 2026 to below 50%. The interest rate differential with the ECB remains wide, contributing to capital outflows from Europe to the US and strengthening the dollar against the euro.
Fed’s Projected Monetary Expansion in 2026
Source: Bloomberg.
Meanwhile, the futures market suggests that the Fed may refuse to continue the cycle this year. The odds of no change in interest rates may rise further if February’s employment figures exceed the 55,000 expected by Bloomberg analysts. However, the weakness of the labor market is unlikely to force the central bank to accelerate monetary expansion.
Weekly EURUSD Trading Plan
The rollercoaster ride in the EUR/USD pair is driven by rumors about the de-escalation of the conflict in the Middle East, such as Iran’s readiness to negotiate or its intention to give up its uranium reserves. The euro is beginning to show signs of consolidation. At the same time, strategies based on a rebound from resistance levels at 1.164 and 1.168 appear to remain valid.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
